What To Know Before Creating A Trust Fund For Your Child

When an individual accumulate wealth, a priority sets in. That priority is the well-being of your family. In the event of a major disability or death, your concern becomes how will the family be taken care of. Particularly, the kids are of most concern. In most cases, individuals with a substantial amount of money, open up trust funds for their children. However, some millionaires and billionaires believe that trust funds are a curse. They believe that having access to this money creates a generation of young adults who are spoiled.

For instance, recently this very issue was brought up during the estate allocations of the deceased actor Philip Seymour Hoffman.  The actor’s accountant recalled conversations in which Hoffman specified that his $35 million fortune go directly to his longtime partner and children’s mother, Mimi O’Donnell. Factually, Hoffman refused to set aside money for his three kids after his accountant suggested that he do so. The reason why Hoffman didn’t want to do that is because he did not want them to be “trust fund” kids.  (New York Post)

Hoffman’s pre-death ideals is shared by many wealthy individuals. However, there are still many that disagree and chooses to create trust funds.

If you are considering setting aside money or assets for your children, there are several things you should know prior to doing so. According to the Fiscal Times, applying these parameters around the trust funds will force responsibility on the kids. Your children, more than likely, will appreciate the inheritance more. They may even become non-spoiled, hardworking and productive adults.

1. Establish flexibility in the trust fund.  Stray away from giving your child all the money at once.  A good practice is to stagger the inheritance. For example, grant a payout every time he or she turns a certain age (i.e. 20 years old, 30 years old, 40 years old, etc).  By doing this, children learn how to be financially responsible. Knowing that they will have to wait 10 more years before another payout, forces young people to watch what they spend.

2.  Create incentives for good behavior. It’s like awarding a canine a biscuit treat for not pooping in the house. The same concept applies here. Add incentives in the trust fund that helps create character. If your child earns a bachelor’s degree, offer a financial reward (of a specified amount).  For bad behavior (i.e. go to jail, abuse drugs, etc), retract any distributions. Forbid that child from receiving any money from the trust fund.

Creating parameters, such as these, will promote a sense of responsibility in the lives of your children. If you had to put in hard work to obtain this wealth, why not make your kid work for it too??

Photo Credit: EOnline